Portfolio Review


List review: Tech still ticks

Technology still exerts an outsized influence on our recommended lists' returns. Of the 26 stocks on our Buy List, 10 hail from the tech sector. On the Long-Term Buy List, 11 of the 34 stocks are tech companies.

That concentration in tech should come as no surprise because the sector earns strong Quadrix® scores. Tech stocks in the S&P 1500 Index average an Overall score of 63, second only to health care. In the following paragraphs, we cover the news on some of our technology recommendations.

New Apple products foster user loyalty

Apple ($332; AAPL) CEO Steve Jobs unveiled new software that strengthens the bonds between its consumer products. iTunes Match, a music-streaming service, will let users remotely access songs from their iTunes library for $25 a year. Apple will keep 30% of that revenue and distribute the remaining 70% to record companies. iTunes Match will work in conjunction with iCloud, a free service that stores photographs, documents, music, and applications, then synchronizes those files to customers' iPhones, iPads, and Macintosh computers.

Apple says it has sold more than 25 million iPads so far. On the iPhone front, Apple overtook Research In Motion ($38; RIMM) for second place in the U.S. smartphone market with a 26% share during the three months ended April, according to industry researcher comScore. Google's ($519; GOOG) Android operating system remains firmly in first place with a 36% share. Apple is a Focus List Buy and a Long-Term Buy. Google and RIM are rated B (average).

Technology review

Texas Instruments ($33; TXN) narrowed and lowered its June-quarter guidance, now projecting per-share earnings of $0.51 to $0.55, compared to the $0.57 consensus. For now, TI remains a Long-Term Buy.

Altera ($46; ALTR) reaffirmed its June-quarter sales guidance of $536 million to $563 million, implying growth of 14% to 20%. The consensus projects revenue of $549 million. Altera is a Focus List Buy and a Long-Term Buy.

BMC Software ($53; BMC) CEO Robert Beauchamp says he expects more industry consolidation, including niche acquisitions for BMC, whose products help run corporate data centers. Beauchamp also suggested that BMC is not in a hurry to put itself up for sale, despite rumors that the company is a takeover target. BMC Software is a Buy and a Long-Term Buy.

With shares trading at seven times trailing earnings, Hewlett-Packard ($36; HPQ) plans to repurchase $3 billion in stock during the July quarter and continue to grow its dividend each year. Buybacks have shrunk H-P's share count by more than 9% in the past year. Earning a Value score of 98, H-P is a Buy and Long-Term Buy.

Corporate roundup

NASDAQ OMX Group ($24; NDAQ) has partnered with Loyal3 to sell stock directly to investors online. Sales channels include Facebook, a social-networking Web site. Investors will be able to buy as little as $10 in shares without the transaction fees that typically accompany purchases through a brokerage. In other news, NASDAQ lags rival NYSE Euronext ($35; NYX) in the 2011 tally of initial public offerings. NASDAQ has registered $4.6 billion in proceeds from 37 IPO listings this year, while NYSE has brought in $23.4 billion from 53 listings. Plenty of big fish remain in the pool of potential IPOs, including coupon site Groupon and possibly Twitter and Facebook. NASDAQ is a Buy and a Long-Term Buy.

Comcast's ($24; CMCSa) NBC Universal unit agreed to pay $1.03 billion for the remaining 50% of Universal Orlando, comprised of theme parks that generated revenue of $1.13 billion last year. NBC Universal also won the U.S. rights to televise the Olympic Games through 2020 with a $4.38 billion bid, nearly $1 billion higher than the nearest competitor. In other news, Comcast plans to begin offering home-security services in seven markets, allowing customers to remotely adjust home lights, thermostats, and security cameras, and to watch live video of their homes online. Comcast is a Long-Term Buy.

Stryker ($59; SYK) agreed to spend up to $162 million to purchase Memometal Technologies, a privately held French surgical-products company that generated $30 million in sales last year. Stryker is a Long-Term Buy.

Goldman Sachs ($133; GS) received a subpoena from the state of New York, stemming from a report issued by the U.S. Senate that accused the bank of misleading clients about bets made on the housing market. Goldman is rated C (below average).

Deepwater energy discoveries

Exxon Mobil ($80; XOM) announced three deepwater discoveries — two oil and one natural gas — in the Gulf of Mexico. One of the wells was drilled this year, one in 2010, and one in 2009. Exxon owns a 50% stake in the wells, projected to produce more than 700 million barrels of oil equivalent. Exxon had proved reserves of 24.81 billion barrels of oil equivalent at the end of 2010. Exxon, which said the discoveries amount to one of the largest Gulf of Mexico finds of the last decade, is a Focus List Buy and a Long-Term Buy.

Hess ($75; HES) says it struck oil in a well drilled off the shore of Ghana. Hess holds a 90% interest in the deepwater well. One analyst projects the field could contain 350 million barrels of oil equivalent. At the end of last year, Hess had proved reserves of 1.54 billion barrels of oil equivalent. Hess is a Focus List Buy and a Long-Term Buy.

Retail wrap-up

Retailers stumbled in May as high energy costs and inflation pressured household budgets. Of the 24 retailers followed by Thomson Reuters, more than 60% fell short of consensus same-store sales estimates, including Target ($47; TGT), TJX Cos. ($51; TJX), Kohl's ($51; KSS), Gap ($18; GPS), and J.C. Penney ($32; JCP). Drugstore chain Walgreen ($43; WAG) bucked the trend, posting 5.6% higher same-store sales for the month, versus the consensus estimate of 4.9%. Walgreen and TJX are rated A (above average).Target and Kohl's are rated B (average).

Wal-Mart Stores ($54; WMT) announced a new $15 billion share-repurchase program, enough to reduce outstanding shares by 8% at current prices. Long before its completion, the buyback will likely leave the Walton family with more than a 50% stake in the company. As of the end of March, the family owned about 48% of Wal-Mart, which has reduced its share count by 7% in the past year. The giant retailer also plans to go smaller by rolling out a series of WalMart Express stores, which will occupy one-tenth the space of a Wal-Mart superstore. The venture fits with Wal-Mart's strategy of entering major cities and could help it compete with dollar stores that performed well during the recession. Wal-Mart Stores is a Long-Term Buy.

Railroad report — CSX on top

Midway through the June quarter, freight rail traffic was up nearly 4% from the same period a year earlier on strong demand for grain, metals, and intermodal cargo. Shares of CSX ($75; CSX) have jumped 50% since the end of June, which prompted the railroad to initiate a 3-for-1 stock split payable June 15. Shares of peers Norfolk Southern ($71; NSC) and Union Pacific ($101; UNP) have also performed well, rising 45% and 34% respectively.

All three railroads grew sales and operating cash flow at double-digit rates over the last year. While all three railroads trade at about 17 times trailing earnings, CSX boasts a higher per-share-profit growth outlook for 2011 (27%) and annualized over the next five years (16%). CSX is a Focus List Buy and Long-Term Buy. Norfolk Southern and Union Pacific are both rated A (above average).

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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